Student Loan Debt: The Only Debt You Can’t Discharge in Bankruptcy

Today’s students are being crushed with John Bunyan’s proverbial burden on their backs – student loan debt. Until relatively recently this debt could have been discharged in bankruptcy.

Then all that changed when Sallie Mae, the Student Loan Marketing Association, was privatized in 2004. Albert Lord, the new CEO, and his lobbyists went to work to change the laws so that student loans could not be discharged in bankruptcy. Today the cumulative student loan debt is more than $1 trillion.

While a generation ago a high school diploma was considered sufficient for a decent middle class entry level job, today it’s a college diploma even if the job itself could be easily accomplished by a person with just a high school education.

In Sallie Mae annual reports, CEO Albert Lord has boasted that the company’s extraordinary financial growth could be attributed to fees collected from defaulted loans, as well as loan origination growth. Lord, who personally invested hundreds of thousands of dollars (on the books) in politicians and PACs involved with education legislation is probably the largest individual beneficiary of student loan privatization.

In 2001, US News reported that Mr. Lord’s compensation for the year 2000 had skyrocketed to over $33 million. From 1999-2004, Sallie Mae’s top two executives, Al Lord and Tom Fitzpatrick, received compensation worth $225 million and $245 million, respectively. Both men have regularly topped Fortune Magazine’s list of highest paid CEO’s in the Washington D.C. Area. Albert Lord also put in a bid to purchase a major league baseball team, the Washington Nationals, with the wealth he extracted from defaulted borrowers.

While Albert Lord and others have profited handsomely from student loan privatization, many of the students themselves have been driven to despair after they graduate and payments on the loans become due. Similar to the pilgrim in John Bunyan’s Pilgrim’s Progress, they enter the slough of despond.

And God forbid they miss a payment or even go into default. Severe penalties double and triple and before they know it, they are owing three or four times the amount of their original student loan. Many student loan debtors, as another writer for the San Diego Free Press explains, have taken the only route out of this living hell they could think of: suicide. It seems that law students are particularly vulnerable to the privatized loan scam since their aspirations are so high and their actual results after graduation are so devastating.

Suicide is the dark side of the student lending crisis and, despite all the media attention to the issue of student loans, it’s been severely under-reported. I can’t ignore it though, because I’m an advocate for people who are struggling to pay their student loans, and I’ve been receiving suicidal comments for over two years and occasionally hearing reports of actual suicides. More people are being forced into untenable financial circumstances as outstanding student loan debt has surpassed $1 trillion. And people simply aren’t able to pay all the money they owe. In the past few years, the rate of defaults for federal loans has increased at an alarming rate. According to theDepartment of Education, those recent graduates who began repayments in 2009, 8.8 percent had already defaulted on their federal loans. That compares to 7 percent in 2008. Currently, 36 million Americans have outstanding federal loans. I can’t help but wonder how many of those millions are feeling distressed or suicidal, or how many have attempted suicide because of all that debt hanging over their heads.

Taking advantage of low income students who want a better life for themselves than their parents had and the siren call of easy money loans that don’t have to be paid back for many years — after the student supposedly has snagged a lucrative professional job, the private loan industry has suckered unsophisticated high school graduates and led them down the garden path of a future filled with prestige and high wages.

The problem is when (and if) that student has obtained that degree, they find that (a) they can’t get that lucrative job because either that job isn’t available or their degree is worthless or (b) they have to move back in with their parents in order to afford the payments on their student loan.

And don’t even think about getting married and raising a family if you have a substantial amount of student loan debt. Each spouse is responsible for the other’s debts including student loan debts. Sort of a dowry in reverse. This is from AboveTheLaw.com

Good luck getting married with your large student loan debt. In the good old days, love conquered all. But today, love is a necessary but not sufficient condition for a lasting relationship. Now that student loan debt exceeds $1.2 trillion and shows no signs of stopping, it is probable that your future spouse will have considerable student loan debt. And you may have to face the possibility that by getting married, you may have to pay your spouse’s student loan debt — possibly for life.

It is common knowledge that large student loan debt is forcing young people to delay getting married and starting families. If both partners have small to moderate student loan debt, they can find a way to deal with it eventually. But those who paid off their student loans will be reluctant to marry someone with large student loan debt unless they have a good job and a realistic plan for paying it off in a short period of time.

Colleges and universities themselves are a major part of the problem. Over the last three decades, the price of a year of college has increased by more than 1,200%. They are selling the American Dream, especially to students from poor financial backgrounds. As we have reported previously, University of Phoenix and Ashford University are particularly culpable.

As Cornell professor Noliwe Rooks and journalist Kai Wright have reported, black college enrollment has increased at nearly twice the rate of white enrollment in recent years, but a disproportionate number of those African-American students end up at for-profit schools. In 2011, two of those institutions, the University of Phoenix (with physical campuses in 39 states and massive online programs) and the online-only Ashford University, produced more black graduates than any other institutes of higher education in the country. Unfortunately, a recent survey by economist Rajeev Darolia shows that for-profit graduates fare little better on the job market than job seekers with high school degrees; their diplomas, that is, are a net loss, offering essentially the same grim job prospects as if they had never gone to college, plus a lifetime debt sentence.

Instead of climbing out of poverty and creating a better life, the students that attend for profit universities end up more bogged down in the poverty muck and being worse off than they would have been if they had never gone to college.

It seems that the American Dream has become the American Scam enriching ambitious entrepreneurs whose combination of privatized education fueled by student loans has contributed to the American nightmare for many of those who would have been better off forsaking high end job fairy tales and instead learned a trade such as carpentry, plumbing, electrical work, nursing, teaching or masonry.

The for-profit institutions are all about maximizing returns for their shareholders, not maximizing the results of the educations they provide for their students.

For-profit colleges can be up to twice as expensive as Ivy League universities, and routinely cost five or six times the price of a community college education. The Medical Assistant program at for-profit Heald College in Fresno, California, costs $22,275. A comparable program at Fresno City College costs $1,650. An associate degree in paralegal studies at Everest College in Ontario, California, costs $41,149, compared to $2,392 for the same degree at Santa Ana College, a mere 30-minute drive away.

A lot of these subprime schools spend more money on lobbying and recruiting subprime students than they spend on their students’ educations. And many of these students never actually graduate although their accumulated student loan debt stays with them for life. Instead of a leg up in the world they get a kick in the backside. They become mired in debt and poverty. Today’s college graduates are in debt and not able to find a job.

The public universities themselves have seemingly taken a stupid pill. They have cozied up to Wall Street lusting after huge gains in the stock market and using fancy derivatives.

Beginning in the 1990s, universities, public and private, began working ever more closely with Wall Street, which meant using tuition payments not just as direct revenue but also as collateral for debt-financing. Consider the venerable but beleaguered University of California system: a 2012 report out of its Berkeley branch, “Swapping Our Futures,” shows that the whole system was losing $750,000 each month on interest-rate swaps — a financial product that promised lower borrowing costs, but ended up draining the UC system of already-scarce resources.

In the last decade, its swap agreements have cost it over $55 million and could, in the end, add up to a loss of $200 million. Financiers, as the university’s creditors, are promised ever-increasing tuition as the collateral on loans, forcing public schools to aggressively recruit ever more out-of-state students, who pay higher tuitions, and to raise the in-state tuition relentlessly as well, simply to meet debt burdens and keep credit ratings high. So Wall Street is directly responsible for high tuition rates. Who would have thunk it? Calling Occupy Wall Street.

Student tuition has had to bear the burden of the university’s gambling binge on Wall Street. When will they ever learn that a public bank could not only save them money but reduce the volatility associated with Wall Street?

The Department of Education (DOE), which could provide debt relief for student loan debtors is instead acting as a debt collector.

Another debtor, a 38-year-old attorney who suffered a pulmonary embolism and went into default as a result, is now more than $100,000 in debt. Bedridden and fully disabled, he accepts he will likely be in debt until his death. He asked that his name be withheld because he doesn’t want to incur the wrath of the government by disclosing the awful punch line to his story: After he qualified for federal disability payments in 2009, the Department of Education quickly began garnishing $170 a month from his disability check.

“Student-loan debt collectors have power that would make a mobster envious” is how Sen. Elizabeth Warren put it. Collectors can garnish everything from wages to tax returns to Social Security payments to, yes, disability checks. Debtors can also be barred from the military, lose professional licenses and suffer other consequences no private lender could possibly throw at a borrower.

On the brighter side, an offshoot of Occupy Wall Street called Rolling Jubilee is helping to pay off medical and student loan debt. They buy up the debt on the secondary market, the way collections agencies do, for pennies on the dollar and then simply pay it off. Why can’t the students themselves (or their agents) buy up their own debt this way and pay it off? Good question and maybe we’ll see more of that in the future.

In Judaism and Christianity, the concept of the Jubilee is a special year of remission of sins and universal pardon. In the Biblical Book of Leviticus, a Jubilee year is mentioned to occur every fiftieth year. In that year slaves and prisoners would be freed and debts would be forgiven. However, there is no jubilee year in capitalism. Society is less humane today.

Debt collectives or debtors’ unions may be the next step in fighting off the predatory lenders’ penchant for turning college graduates into indentured servants. Collective action can empower individual debtors who feel hopeless, powerless and desperate. You can congregate and share your story with others at studentloanjustive.com, a website started by Alan Collinge who is fighting for the repeal of the law that prevents you from discharging your loan in bankruptcy.

Or it might be better to just liberate yourself from the debt by refusing to pay it and living with the consequences. You would have to abandon whatever employment your degree bought you. You might have to leave the country in which case your future education will ironically be free. Or you can be self-employed working on a cash basis. Actually, self-employment is not a bad option. Knowing what you know now about the student debt rat race, you probably would have chosen that over a college degree in the first place. Students of the world unite. You have nothing to lose but the burdens on your backs!

You can join a DIY Resistance movement as San Diego Free Press writer Will Falk has and become modern day Robin Hoods taking from the rich to help the poor:

Part of my recovery from suicidal depression involves me recognizing poisoned thought patterns. Guilt over debt is poison. I have decided I will not pay my student loans back. I refuse to pay an illegitimate, occupying, imperial government engaged in genocide around the world for an education that should rightfully be free anyway. Now, when Heather-from-Sallie-Mae-Department-of-Education-Loan-Services leaves me a message, I am empowered to laugh.

Lately, for smiles, I’ve called myself a post-modern Robin Hood. Not paying my student loans is like stealing my education from the government. Just like Robin Hood of old, I stole my education, my intellectual experiences, and my degrees from the rich, and am using that education, those experiences, and the letters behind my name to fight for the poor. Come join me in a refusal to let money stop us from action. We can form a merry band and save the world while we’re at it.

Related

Why not mention how payments can be capped at 10% of income and automatically discharged after 20 years? All you have to dk is be current and apply. Weird to leave that important and useful information out of the piece. Let the taxpayers and the rich eat the discharged principal.

Yeah, people that have been paying on their loans for the past 15-20 and recently entered the program are becoming and have become eligible for forgiveness. There’s just one problem: When you get close to that magic number they look for a reason, any reason, to kick you out of the program and demand full payments that you can’t make since interest has increased your amount owed 5-10X what the original amount was. That program is a scam. Just like the loans. All types of payment and rehabilitation are set up to make the borrower fail.

The only problem with that premise is if you graduated back in the late 90s and were smacked by the 2nd great depression (which people are still lying about and calling a recession), going on an income based plan means you’re not even covering interest on what you owe. The government has claimed going to college and getting your degree is your ticket to a better life, and it was; until the government started caving to business’ every whim. Far as I’m concerned, government broke that social contract, government needs to pay for doing so.

That’s an excellent point. Then, of course, we would have to mention the more recent revelations about the enormous numbers of borrowers’ being tossed out of these income based and other hybrid payment plans. Recent reports have found that over 60% lose their standing due to various “administrative glitches.”
This, as I’m sure you know, Mr. Sean ” I’m afraid to use my name,” leaves these borrowers with loan balances many, many times what they started with. Thanks for participating in the conversation though.

The problem is the cost of education. Capping loan amounts would cap tuition increases and cap how much students borrowed. Without these outrages federal loan amounts, institutions would have to lower their tuition to fill their classrooms and dorms.

What incentive do colleges have to reign in tuition costs when the feds loan money so freely for college? Perhaps if they got out of the business of college loans, prices would slowly drop when fewer people are paying the huge costs.

yeah, it is but another case of good intentions gone awry. i believe it was the Clinton administration that really made loans more accessible. they meant well, but now anyone can go to college and graduate school which has created a huge supply of professionals with way less demand. in their defense, when they made the loans more accessible the loans were still dischargeable in BK. The 2005 BAPCPA made the loans non-dischargeable which really changed things.

Thank you for this wonderful article that state the facts.. I promise you until full student loan bankruptcy is restated there will be no real solution to the $1.2 Trillion student loan debt …..that is growing faster today than ever before!http://projecttuitionreimbursement.com

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